What the Stock Market Has to Do with Bass Fishing

When things are unclear, I like to go fishing. Preferably, I like to go fly fishing, but I’m willing to make allowances depending on the location. Having recently gone bass fishing, it occurred to me on the water that the outcome for the stock market was just as uncertain as catching a bass. Things could go well depending on the weather, the right, enticing bait, and whether there are actually fish located where you’re fishing. Similarly, the stock market could go up depending on the right investor sentiment, the right conglomeration of news, and whether earnings support the fundamentals. Right now it’s tough fishing and the weather isn’t looking good.

I think it’s still too early to express a definitive view in the current equity marketplace. We’ve had good corporate news and good economic news. Yet, just when things look like they’re turning a corner, we get the opposite news and equities retreat.

No, we’re still in a consolidating bear market for stocks. The system is still working at balancing itself out and we’re only at the end of the beginning of this cycle. Accordingly, there isn’t much new action to take.

The rest of 2010 should be difficult, both in terms of corporate developments and economic fundamentals. I believe in the need for some downside protection in this market and I also believe that exposure to gold is a virtual necessity, even if we do go through a period of price stability or deflation.

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We’re harping a lot on gold these days and I know that a lot of individual investors are reticent about these kinds of investments. It’s true that precious metal investments aren’t quite the same as buying a stream of earnings based on the sale of a manufactured product. But, as you already know, there isn’t much growth out there no matter what the industry. With the current fundamentals, I’d rather bet on production growth by the ounce of gold, even with a fluctuating spot price. It’s a business model that beats all others right now.

We are starting to see industry consolidation in the gold business and this is a sign that business is good among the larger players. Cash flows are up, debts are down and profits are plentiful. If you’re still sitting on the fence about gold, that’s okay. There’s no rush to do anything in this market. I would say, however, that a gold position represents both upside and downside protection in a market that’s caught in a funk.

Picking stocks is always like bass fishing. You never know how things will turn out. But, as an equity speculator, the job is to take in as much information as possible and express a view with the highest reasonable likelihood of success. It’s the exact same thing as tossing a hook in the water.